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Essay on Stock Market and Paramount

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Case Study Questions –Paramount Communications Inc. 1993-

Why a paramount is a takeover target?

Several Strategic Reasons
- Cost reduction: through combinations of similar business and economy of scales
- Sales increase: a) cross-promotions of each company’s brand and utilization of each company’s channels, and b) cooperation in international businesses.

2. Which of the two firms (Viacom or QVC) would make a better fit with Paramount?

-Viacom: Overlap in the business creates synergies regarding cost and revenue. However, cannibalisation may happen in the near future.

-QVC: Small rooms for synergies (cost reductions may be limited to non-business section.). Volatility may high regarding the realisation of …show more content…

5. What is Paramount worth to Viacom?
- Theme park (cross-selling)
- Film Library/Film Distribution Business

6. What is Paramount worth to QVC?
- New business opportunities in Entertainment
- Film Library/Film Distribution Business

7. Compare your valuation with Smith Barney’s. What assumptions do you have to make to get the terminal value EBITDA multiples used by Smith Barney. Is there any benefit of their method relative to FCF method?

Smith Barney is using EBITDA of 14 to 16X. Since EBITDA multiple tends to revert to a certain level over the year, we need to assume that the market will keep pricing the company at the same level of 1993.

The merits of EBITDA multiples:
-They don’t need to assume the perpetual growth rate which is hard to calibrate but has substantial impact on pricing.
-They can ignore the capital structure change
-Easier to understand (it is “market consensus”)

8. What doe 30% premium suggest? Is it reasonable?

30% of premium over the market price may be reasonable given;
a) control premium
b) the nature of takeover (it can be considered as “Insider Trading”, and to avoid litigation by shareholders, an acquirer may need to pay premium)
c) consideration of synergies through a takeover.

9. How should Redstone proceed? What price should he offer? Should the offer be a cash offer, a stock offer, or

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